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Financial plan needed to achieve life’s dreams

Maybe you have heard the saying, “If you want to hear God laugh, tell Him your plans.”

What is this message trying to communicate to us? That we should not bother to plan because the future is so uncertain that our plans are certain to fail?

From a financial perspective, especially when looking into the distant future, this conclusion will be disastrous. Financial planning is essential to achieving our dreams in life.

As we examine our lives, uncertainty is all around us. What will the weather be like tomorrow—or next week? What will be the effect of Obamacare on us individually? How long is the commute to and from work, especially if we have to pass through the construction at Quantico? Will the Redskins ever be competitive again?

Some of the uncertainty might have an important impact on our lives, positive or negative, and others not so much, but there is one thing that is certain for all of us. Each of us is getting older every day. But there is uncertainty in getting older, too.

What are we going to have to do to survive later in life? For some of us, retirement may not be in the cards for various reasons, but hopefully, a lack of a financial plan is not one of them.

Many financial plans are based on three assumptions: (1) the amount you save periodically, (2) the rate of return you can earn on savings, and (3) the length of time you have to save. Each of these assumptions has an impact on the forecasted results of your financial plan.

Obviously, the more you save during your life, the more you will have accumulated at your retirement age (whatever that is). Likewise, the higher the return on savings, the faster your nest egg will grow. But what is often overlooked is the effect of time.

In my opinion, time (and timing), are the most important factors to understand when planning your future. Consider two situations. The first is the hare—a young person who decides to start saving $250 per month when she turns 22 and continues to save that amount monthly for eleven years. After turning 33, she stops saving all together. Assuming a growth rate of 8 percent, our hare would have a retirement fund of over $675,000 at the age of 65, despite putting in only $33,000 of her own money into the plan.

The turtle, on the other hand, starts saving $250 per month when he turns 33 years old, and continues to save that amount each month until he reaches his retirement age of 65.

In this situation, the turtle has put away a total amount of $96,000 of his own money. Assuming the same return of 8 percent, our turtle will have accumulated just over $440,000 by age 65.

As the example shows, sometimes it is better to be the hare than the turtle, and in terms of planning for your future, time is a very important ally. None of us can turn back the clock to invest at an earlier time, so my suggestion is to start today.

So where do you start saving? Most of us, if we look honestly at our spending habits, can find a couple of places to trim back our spending.

Cutting back on eating at restaurants, buying a car that is a year or two old rather than a brand new one, reevaluating our vices, not buying a $4 latte every morning to get us ready for the commute, or brown bagging lunches are a few suggestions.

Obviously people save for reasons other than retirement, too. Making sure we have three to six months of money in an account easily accessible is important for those emergencies that occur. While these accounts may not provide the higher returns on our savings as the retirement accounts might, they are still important.

Otherwise, how will you pay for the vacation you want to take, the unexpected car repair bill, or when you need to buy a prom dress for your teen?

My best advice is to reach out to a financial planner to develop a plan that will help you achieve the financial goals you set for yourself. It is never too late to start a savings plan, but not saving at all is never a good plan.

To twist the phrase that opened this column, if you don’t want to cry when you reach retirement age, you need to start to plan today.

This is one in a series of columns by University of Mary Washington College of Business faculty on various aspects of finance and economics as they affect our readers. Ken Machande is a UMW associate professor of accounting

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